The time is ripe, at least for an initial review, for the creation of small-scale real estate investment funds in Cyprus, based on the following:
- Prices have reached rock bottom for suitable properties, and I do not expect any notable discount/reduction over the immediate future.
- Banks and asset companies are offering real estate for sale, either in swap deals or auctions at reasonable prices. Those can be negotiated for a further reduction, coupled, in most cases, with financing (to reliable buyers).
- There is an ample supply of all types of real estate in all districts.
- Existing buyers and resales to new buyers could be coupled with long term finance, subject to prior agreement with the lenders.
- Most property sales are based on a clean record and no prior obligations by owning companies, reducing or even doing away with transfer fees.
- Interest on deposits has been reduced from the original level of 6% to a negative rate at present, whereas deposit rates abroad are around 0.5%, with most foreign banks charging administration fees.
- Real estate prices based on recent developments and projections appear to be on the increase (at least for select properties).
- There is prevailing concern about European banks (Greece, Italy) and some local ones on their stability.
- The previously popular regions for investments by locals, such as Greece, are not at the best point at present, bearing in mind the country’s uncertain economic future. In contrast, London has its own problems with the unknown consequences of Brexit.
With all of the above in mind and with limited financing available for the Cypriot real estate market, it is perhaps the right time to examine the possibility of setting up small scale local real estate group investments.
I suggest that such funds could vary in size and scope but must have:
- Initial fund capital of €5 mln.
- Target to borrow €3 mln.
- Period of exit of the fund 6-8 years.
- Target for an annual return ±4% p.a.
I suggest the following market target as a start:
- Aim at the seaside areas of the Famagusta region (Ayia Napa-Paralimni-Sotira-Dherynia) for land development.
- Target buildings for income let to reliable tenants with mid-term lets (at least 4-6 years), showing a return of ±4% gross.
- Aim for secondhand residential apartments in chosen localities within towns and need renovation/improvement and a good chance to resell. Avoid the tower blocks aimed at the ‘golden passports’ investors, which has now been abandoned.
Perhaps these funds could be created initially with the lender being the major shareholder, with an option (or otherwise) to exit in 2-4 years.
Since management will be in the financier’s hands, the other shareholders will most likely feel secure instead of a private company or individual being in control of the fund.
The more attractive the fund appears to the market, the greater the demand for it, and it is one way out for the financiers to dispose of their properties, which they now hold and struggle to get rid of.
If the lender or the majority shareholder “guarantees” an annual income for the initial period of 2-3 years of 1.5-2.5% p.a. it will become even more attractive securing an initial return, plus the expected capital appreciation and the anticipated profit at the end for the shareholders.
The lenders could set up funds for various levels of equity investments.
More considerable funds could be set up aiming at bigger investments, such as hotels, golf courses, beach land, student halls, beach villas, villas to let.
Notwithstanding the Cypriot economy’s situation, the real estate market is improving with clear signs for a positive future, save the Covid situation.
Instead of the prevailing situation of financiers sitting back and waiting for investors to show interest in properties, the above vehicle for sale is one option that might attract the big investment buyers from abroad (such as Chinese interest in shopping malls, hotel development).
If this idea is appropriately studied and promoted, it is worth exploring, especially by financiers and other cash-rich investors.
Alternative funds
Regarding alternative investment funds, although it sounds odd, agricultural fund investment should not be discounted outright.
The problem with this fund is the small agricultural land pieces, which does not allow economies of scale.
However, with the halloumi and other local products produced as patented products, all possibilities should be investigated.
If financiers get together and discuss how to promote these agricultural plots as packages, it could be possible to develop large holdings.
So, if one financier owns an X plot and another a plot next door or nearby, provided they agree to get together, bundling them could be a solution.
Agricultural investment will also need a special study on soil and produce quality.
The Ministry of Agriculture could help with expert knowledge, whereas the various subsidies and insurance is an added plus.
Agricultural investments will need a lot of persuasion as the broader market does not easily understand it; it will be a difficult job.
What can one do with the various agricultural plots that are now in bank portfolios and remain idle?
